Assessee wins deduction under section 35(1)(ii) despite bogus donation allegations without independent inquiry or material evidence

ITAT Mumbai allowed the assessee's appeal regarding deduction claimed under section 35(1)(ii). The AO had disallowed deductions based on Investigation Wing's report alleging bogus donation receipts issued in exchange for commissions. The tribunal held that AO failed to conduct independent inquiry and brought no material evidence to disprove assessee's documentation regarding donations paid to institutions. No proof existed showing cheques were returned as cash to assessee. Subsequent withdrawal of institutional recognition under section 35(1)(ii) does not bar deduction for earlier donations. Deduction allowed for both assessment years.

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Issues Involved:
1. Disallowance of deduction claimed under Section 35(1)(ii) of the Income Tax Act, 1961.
2. Validity of donations made to scientific research institutions.
3. Reliance on the Investigation Wing's report by the Assessing Officer (AO).
4. Subsequent withdrawal of recognition of the institutions by the Central Government.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction Claimed under Section 35(1)(ii):
The assessee, a partnership firm engaged in the export business, claimed deductions under Section 35(1)(ii) of the Income Tax Act, 1961, for donations made to two scientific research institutions. For the assessment years 2014-15 and 2015-16, the assessee donated Rs. 75,00,000 and Rs. 55,00,000 respectively, and claimed weighted deductions of 175% of the donation amounts. The AO disallowed these deductions based on a report from the Investigation Wing, which alleged that the donations were bogus and provided in exchange for commissions. The learned CIT(A) confirmed the disallowance, leading the assessee to appeal before the Tribunal.

2. Validity of Donations Made to Scientific Research Institutions:
The assessee argued that the donations were made through banking channels and supported by valid donation receipts and recognition certificates under Section 35(1)(ii). The AO did not dispute the documents submitted by the assessee but relied on the Investigation Wing's report. The Tribunal observed that the AO did not conduct an independent inquiry or provide evidence to prove that the donations were bogus or that the money was returned to the assessee. The Tribunal emphasized that the subsequent withdrawal of recognition does not affect the validity of the donations made earlier.

3. Reliance on the Investigation Wing's Report by the Assessing Officer (AO):
The Tribunal noted that the AO's reliance on the Investigation Wing's report without independent verification was not justified. The report indicated that the institutions issued bogus donation certificates in exchange for commissions, but there was no specific evidence against the assessee. The Tribunal cited previous decisions, including the case of Sopariwala Exports Pvt. Ltd., where similar disallowances were overturned due to lack of direct evidence against the assessee and the principle of natural justice being violated by not allowing cross-examination of the witnesses.

4. Subsequent Withdrawal of Recognition of the Institutions by the Central Government:
The Tribunal referred to multiple precedents where it was held that the withdrawal of recognition of the institutions by the Central Government does not retroactively invalidate the donations made when the institutions were duly recognized. The Tribunal reiterated that the assessee could not have anticipated the withdrawal of recognition and that the donations were valid at the time they were made.

Conclusion:
The Tribunal concluded that the AO's disallowance of the deductions was not justified as there was no independent inquiry or evidence to support the claim that the donations were bogus. The Tribunal set aside the orders of the learned CIT(A) and directed the AO to allow the deductions claimed by the assessee under Section 35(1)(ii) for both assessment years. The appeals filed by the assessee were allowed, and the order was pronounced in the open court on 05/07/2024.

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